Question

The following percentages apply to Stuart Company for Year 3 and Year 4:

	Year 4				Year 3
Sales		100.0	%			100.0	%
Cost of goods sold		61.0				64.1
Gross margin		39.0				35.9
Selling and administrative expense		26.3				20.7
Interest expense		2.4				2.1
Total expenses		28.7				22.8
Income before taxes		10.3				13.1
Income tax expense		5.7				7.2
Net income		4.6	%			5.9	%

Required
Assuming that sales were $515,000 in Year 3 and $585,000 in Year 4, prepare income statements for the two years.

	STUART COMPANY Income Statements Year 4 Year 3 Sales Cost of goods sold Gross margin 0 0 Selling and administrative expenses Interest expense Total expenses 0 0 Income before taxes Income tax expense Net income $0 $0

Answer 1

• Requirement

STUART COMPANY
Income Statements
	Year 4	Year 3
Sales	$585,000	$515,000
Cost of goods sold	$356,850	$330,115
Gross margin	$228,150	$184,885
Selling and administrative expenses	$153,855	$106,605
Interest expense	$14,040	$10,815
Total expenses	$167,895	$117,420
Income before taxes	$60,255	$67,465
Income tax expense	$33,345	$37,080
Net income	$26,910	$30,385

• Calculation

STUART COMPANY
Income Statements
	Year 4	Year 3
Sales	585000	515000
Cost of goods sold	=585000*61%	=515000*64.1%
Gross margin	=585000*39%	=515000*35.9%
Selling and administrative expenses	=585000*26.3%	=515000*20.7%
Interest expense	=585000*2.4%	=515000*2.1%
Total expenses	=585000*28.7%	=515000*22.8%
Income before taxes	=585000*10.3%	=515000*13.1%
Income tax expense	=585000*5.7%	=515000*7.2%
Net income	=585000*4.6%	=515000*5.9%